Issues for employers

This guide is based on UK law. There is an equivalent Hong Kong guide.

Overview

This guide sets out some of the contractual issues which have to be considered by a UK business in relation to its use of personnel whether employees or contractors.

Employees and contractors

The personnel engaged in a business fall into one of two categories: employees and contractors.

The distinction between an employee and an independent contractor is an important one.

• Statutory employment protection rights are directed mainly towards the protection of employees. For example, only employees can claim compensation for unfair dismissal or a redundancy payment.
• Employees have tax deducted at source under the PAYE system under Schedule E. Independent contractors are entitled to receive remuneration gross and pay tax under Schedule D.
• National Insurance contributions are paid by employees on a different scale from that which applies to other categories of worker.
• An employer owes more extensive duties to employees and bears a greater degree of responsibility for their actions.
• The terms which a court will be prepared to imply into contracts of employment are different from those which would apply to another status of worker.
• It might be thought beneficial for a business to declare that its personnel are all contractors but the intention of the parties is only one element in deciding whether a particular person is an employee of a contractor. Most of the tests are objective:
• • Does the worker have a duty to provide a personal service (or can the worker appoint someone else to perform his or her duties)?
  • Is the basis of payment regular or is it dependent on results? Where is the work done and with whose equipment?
  • Is there a regular working pattern?
  • How much control does the employer exercise?
  • How is tax accounted for?
  • Is the worker bound to accept work when it is offered to him?

Depending on how these questions are answered a worker may be treated as an employee by the courts or the Inland Revenue even though both he and his "employer" have agreed that he should be a contractor.

Do you need to provide an employment contract?

There is no obligation to give an employee a written contract of employment. However, employers are well advised to issue written contracts for the following reasons:

• There is in any event an obligation on every employer to issue an employee with a written statement of certain key terms and conditions of employment.
• If an employee does not have a written contract of employment, that does not mean that there is no contract – a court would recognise that a contract exists by virtue of the fact that there is a bargain to provide services in exchange for payment: it is merely that it has not been written down. To the extent that there is no agreement as to certain terms and conditions of employment (for example, as to an appropriate period of notice), a court will imply a term based on what it assumes that the employer and the employee would have agreed had they turned their minds to the issue. Typically, a court will take into account what is normal within that company and what is normal within that industry.
• There is a myth that greater flexibility can be achieved by not committing oneself to a written contract. In fact, there is much more flexibility to be achieved by a written contract that contains clauses providing for flexibility.
• The certainty to be achieved from a clear, written understanding of the basis of the employment relationship saves a lot of unnecessary dispute and uncertainty.

Ownership of intellectual property

Where a worker may be inventing new products or processes, developing or improving software or creating know how, it is important for express provision to be made for the ownership of any intellectual property which may be created, such as copyright or patents. See our guide on Branding and Intellectual Property. In order for the employer to retain control of any intellectual property created by a worker he or she should be obliged to:

• disclose all inventions created during his or her employment or engagement with the employer;
• keep those inventions confidential;
• hold any intellectual property on trust for the employer;
• do whatever may be necessary to vest intellectual
• property rights in the employer, including co-operating in any registration procedures such as patent applications; and
• licence the use by the employer of any intellectual property which it does not own and allow its use by a number of other users.

Employee confidentiality

In certain circumstances, the law is prepared to imply restrictions on the use of confidential information into relationships between employers and workers. However, employers would be well advised to include in any contract with a worker an express restriction on the use of confidential information. Such a clause should deal with the following:

• The employer should state exactly what information he or she deems to be confidential. In particular, items which are highly confidential, such as trade secrets, should be categorised as such.
• The employer should state for how long the restriction is to apply. It is possible to restrict the use of confidential information both during and after the termination of the employment or engagement. However, a restriction post termination may be more difficult for an employer to enforce.
• A worker should be restricted from using and disclosing confidential information.
• The restriction should not apply to confidential information which has been made public other than through its disclosure by the worker.

Where there is no direct contractual relationship between the employer and the worker, for example, where the worker is employed through an agency, the employer should ensure that the agency agrees to ensure that each member of its staff will sign up to a confidentiality agreement in favour of the employer.

Restrictive covenants

A worker may gain valuable information regarding his or her employer's business and knowledge of its operations and could cause serious damage to his or her employer's business by using that information to set up a competitive business or to work for an existing competitor. To protect itself against such a threat, an employer will often seek to impose restrictive covenants.

Restrictive covenants may seek to restrict a worker from:

• poaching clients or dealing with clients of the employer;
• poaching other employees;
• engaging in any competitive activity.

Restrictive covenants will only be enforceable if:

• the employer can show that he or she has a legitimate business interest to protect; and
• the restriction is reasonable in all the circumstances.

It will not be appropriate to impose restrictive covenants on every worker. An employer must carefully consider what information a particular worker may have access to and what impact that worker leaving to join a competitor or setting up in competition would have on the employer's business. The threat of a junior worker leaving to work for a competitor will clearly not be the same as a senior executive doing so.

The scope of restrictive covenants must be limited so that they do not seek to restrict the employee more widely than is necessary for the employer to protect his or her business. Particular care should be taken to limit the geographical extent of the covenant and its duration.

Gardening leave

An employer may also be able to restrict the competitive activities of a worker through the use of a gardening leave clause. To do so, the employer provides in the contract that it has no obligation to provide work to the worker or alternatively reserves the right to vary the worker's duties.

If the worker serves notice that he or she intends to terminate the relationship, the employer can insist that the worker must give proper notice of termination in accordance with the terms of the contract. During such notice period, the employer then exercises its right not to provide any work to the worker and to reassign the worker's duties. By doing so, the employer is able to limit the worker's exposure to confidential information or to client contacts for the duration of his or her notice period.

As with restrictive covenants, a gardening leave clause must protect a legitimate business interest of the employer and must be reasonable in all the circumstances. Care must be taken as to the duration of any period of gardening leave an employer's right to place a worker on gardening leave for an excessively long period of notice is unlikely to be unenforceable.

A worker who is on gardening leave must continue to receive his or her salary and benefits throughout the period of his or her notice.

Other Issues

Numerous other issues have to be considered in connection with personnel. For example, discrimination and health and safety. See also our guide on Internet and Email Policies.